India: ECB Policy Overhauled - Two Steps Forward, One Step Back

Last Updated: 5 January 2016
Article by Kumar Saurabh Singh, Manisha Shroff and Ahana Sinha

Most Read Contributor in India, July 2019

The much anticipated revisions to the External Commercial Borrowings (ECB) regime was announced by the Reserve Bank of India (RBI) on 30 November 2015 and became effective from 2 December 2015 upon relevant regulatory notifications being made in the official gazette of the Government of India as the revised framework of the ECB policy (the Revised ECB Framework). The Revised ECB framework was preceded, earlier this year, by a liberalised framework for the issuance of rupee denominated bonds overseas ('Masala Bonds', as they are popularly called), which was introduced by the RBI on 29 September 2015.

The Revised ECB Framework is, inter alia, intended to:

  1. liberalise the ECB regime, with fewer restrictions on end uses, higher all-in-cost ceiling, etc. for long term foreign currency borrowings;
  2. incentivise INR denominated ECBs so as to transfer the currency risk to the lender;
  3. expand the list of overseas lenders to include long-term lenders such as, insurance companies, pension funds and sovereign wealth funds;
  4. align the list of infrastructure entities eligible for availing ECBs with the 'Harmonised List' of the Government of India.

The key highlights of the Revised ECB Framework are as follows:

Classification of ECBs based on tenor – introduction of a 3-Track approach

The bifurcation of ECBs into approval and automatic routes (with parameters such as eligible borrowers, recognised lenders, permitted end-uses and other restrictions) under the extant ECB guidelines has been largely modified and linked to three identified 'Tracks' under the Revised ECB Framework, on the basis of Minimum Average Maturity (MAM) and currency denomination, as follows:

Track 1

Medium term foreign currency denominated ECBs can be availed with a MAM of 3/5 years

Track 2

Long term foreign currency denominated ECBs can be availed with a MAM of 10 years

Track 3

Indian rupee denominated ECBs can be availed with a MAM of 3/5 years

While ECBs availed under any of the above Tracks are under the automatic route (provided such ECBs are in compliance with the specified limits and parameters applicable for such Track), the RBI approval route continues to be applicable in comparatively limited cases such as: (i) ECBs beyond the borrowing limits specified under each Track, (ii) Foreign Currency Exchangeable Bonds, (iii) borrowings and on-lending by the Export Import Bank of India, and (iv) ECBs for the purposes of importing second-hand goods. The intent behind this revision appears to be to discourage applications under approval route beyond the limited categories as set out above.

Larger pool of Recognized Lenders/Investors

One of the key positive changes to the Revised ECB Framework is the introduction of a new category of 'overseas long term investors' as recognised lenders, which includes prudentially regulated financial entities, pension funds, insurance companies, sovereign wealth funds and financial institutions located in 'Institutional Financial Services Centres' in India. However, the term 'prudentially regulated financial entities' is not defined and requires further clarity.

In addition, the RBI has also included group companies of eligible borrowers (which have a common overseas parent) within the realm of a 'foreign equity holder'. The expansion in the list of recognized lenders is a welcome move and is expected to increase the flow of funds from these sources, keeping in mind the increasing interest recently shown by these long term investors to participate in the Indian debt market.

However, overseas branches / subsidiaries of Indian banks cannot provide ECBs under Track II and Track III, which may end up restricting this source of funding, particularly to the Infrastructure sector.

Liberalisation of Borrowing Limits for certain sectors

Under the Revised ECB Framework, companies in the infrastructure sector (which includes hotels and hospitals) and the manufacturing sector are now permitted to avail ECBs up to USD 750 million in a financial year, under the automatic route, as opposed to the earlier limit of USD 200 million applicable to companies in the hotels and hospitals sector under the erstwhile regime.

However, the borrowing limits for companies in the software sector have been retained at USD 200 million per financial year. Further, entities engaged in micro-finance activities can now avail up to USD 100 million while all other entities have to comply with a ceiling of USD 500 million in each financial year.

Although the limits have been significantly relaxed for certain sectors which fall within the definition of 'infrastructure sector' under the Harmonised Master List of Infrastructure sub-sectors dated 27 March 2012 (the Harmonised Master List), overall, the borrowing limits available to companies in all other sectors have been reduced from USD 750 million to USD 500 million in a financial year.

Importantly, the RBI has clarified that the limits under the Revised ECB Framework are separate from and in addition to the USD 750 million limit specified under the Masala Bonds regime.

No substantive alterations to the list of Eligible Borrowers

Except a few additions, the list of 'eligible borrowers' has not been significantly altered but has been spread out under the three Tracks. These additions include Real Estate Investment Trusts (REITs) /Infrastructure Investment Trusts (INVITs) (under Track II and Track III) and companies providing logistic services (under Track III).

Similar relaxations have been extended to developers of Special Economic Zones (SEZs) and National Manufacturing Investment Zones (NMIZs) (who could earlier avail ECBs under the approval route), as they have now been listed as eligible borrowers under Track III.

Further, under the erstwhile regime, airline companies were permitted to avail ECBs only for working capital purposes under the Approval Route. Under the Revised ECB Framework, airline and shipping companies have been identified as 'eligible borrowers' (for import of aircrafts or vessels only) under all three Tracks. Limited liability partnerships continue to remain ineligible for availing ECBs.

Another key change is in respect of non-banking financial companies (NBFCs), which can now avail ECBs only under Track III, which entirely eliminates access to foreign currency denominated ECBs for NBFCs.

Significant implications for the Infrastructure sector

Under the new regime, companies in the 'infrastructure sector' can avail ECBs under Track II and Track III. As a result, infrastructure companies would no longer have access to shorter term foreign currency denominated ECBs under Track I but only long term ECBs under Track II and INR denominated ECBs, under Track III.

Moreover, the definition of 'infrastructure sector' has now been linked with the Harmonised Master List. It may be worthy to note that, although the definition of 'infrastructure sector' under the erstwhile ECB regulations remains largely similar to the definition set out under the Harmonised Master List, certain additional infrastructure sub-sectors which appear in the Harmonised Master List are slurry pipelines and parks with industrial activity such as food parks, textile parks, agricultural markets and terminal markets. On the other hand, certain important sectors such as mining, exploration, refining and fertilizers have been removed from the ambit of 'infrastructure sector' according to the Harmonised Master List, which means that only the Masala Bonds route would now be available to companies engaged in mining, oil and gas exploration and refining and fertilizers, who are seeking to avail financing from non-resident lenders.

Similarly, developers of low-cost affordable housing projects (who could earlier avail ECBs under the approval route), have now been removed as 'eligible borrowers' under the present ECB regime and would therefore have access to debt financing from non-resident lenders only in the form of Masala Bonds, after 31 March 2016.

All-in-Cost Ceilings tightened further

Under the Revised ECB Framework, guarantee fees (payable in INR or foreign currency), and all other fees, charges, expenses payable in INR are now included within the calculation of the all-in-cost ceiling.

Further, the Revised ECB Framework mandates a reduction of 50 basis points for ECBs under Track I as compared to the erstwhile ECB regulations. However, for ECBs availed under Track III, the all-in-cost shall be in conformity with the prevailing market conditions.

In addition, whilst the erstwhile ECB regulations stated that penal interest should not be more than 2% of the all-in-cost (which would include rate of interest, fees and expenses in foreign currency), the Revised ECB Framework states that the penal interest should not be more than 2% over and above the 'contracted rate of interest'.

No Major Relaxations in the Permitted End-uses

The Revised ECB Framework has segregated the permitted end-uses under the different Tracks and has included fewer restrictions on end-uses. For example, direct / indirect foreign equity holders and group companies are now permitted to provide ECBs for general corporate purposes with a lower MAM period of 5 years (as opposed to 7 years under the erstwhile regime).

Further, the Revised ECB Framework has extended the benefit of borrowing for 'general corporate purposes' as a permissible end-use to all eligible borrowers under Track I and Track II, and Track III other than for NBFCs, developers of SEZs / NMIZs, other eligible MFIs, NGOs and non-profit companies.

Separately, the Revised ECB Framework has also provided for certain additional end-uses which are now permitted under the automatic route. For example, payment of capital goods already shipped/imported but unpaid has been added as a permitted end-use under the Revised ECB Framework. Shipping and airlines companies can now raise ECB only for import of vessels and aircraft respectively and refinancing of existing trade credits raised for import of capital goods are now permitted under Track I.

Tightening the regime for overseas guarantees for securing ECBs

Broadly, the regime for securing ECBs remains consistent with the erstwhile ECB Regulations. However, ECBs can now be credit enhanced or guaranteed by an overseas party only if the guarantor qualifies as a recognized lender under the Revised ECB Framework. The restrictions on issuance of guarantees, SBLCs, letters of undertaking or letters of comfort by Indian banks, all India financial institutions and NBFCs relating to ECB continue to prevail. Further, financial intermediaries have been specifically restricted from investing in FCCBs.

Extension of time for parking ECB Proceeds

While the conditions in relation to parking of ECB proceeds are similar to erstwhile guidelines, the Revised ECB Framework permits eligible borrowers to park ECB proceeds (meant for Rupee expenditure) in unencumbered term deposits with AD banks up to 12 months (previously 6 months).

Additional 'no-objection' required for prepayment

Under the Revised ECB Framework, any pre-payment of ECBs availed under the new regime, subject to compliance with the stipulated MAM, will now require a prior No-Objection Certificate (NOC) from the AD Bank. Under the erstwhile regime, so long as the MAM of the original ECB was maintained, no approvals/NOCs were required.

Sunset provisions

ECBs can be raised under the erstwhile ECB regime up to 31 March 2016, provided the loan agreement is signed before 2 December 2015. Additionally, ECBs can be raised under the erstwhile regulations by:

  1. airline companies for meeting their working capital requirements;
  2. consistent foreign exchange earners under USD 10 billion Scheme; and
  3. low cost affordable housing projects, provided the loan agreement is signed and the Loan Registration Number is obtained prior to 31 March 2016.


The Revised ECB Framework has been drafted with a view to provide a simplified and more liberalized regime for ECBs. While the new regime attempts to streamline the applicable regulatory framework and has opened up opportunities for a wider category of lenders to participate in lending to Indian borrowers, further clarity is required on some aspects (as set out below), in order to properly achieve the policy objectives:

  • The Revised ECB Framework is silent on the provisions in the erstwhile ECB regulations on structured obligations, trade credits and bridge financing. Consequently, it is unclear whether these provisions continue to remain applicable and may require clarifications from RBI in due course;
  • It is unclear whether or not the Masala Bonds regime is to be read in conjunction with the new ECB framework (under Track III). If the former view is adopted, it would open up a 'IVth Track' whereby companies such as software companies that have limits under the Revised ECB Framework would be able to borrow an additional USD 750 million through the Masala Bond route;
  • The revised definition of "infrastructure sector" seems to have unintentionally left out certain key sectors like mining and oil & gas exploration, which largely relied on ECBs for their capital expenditure requirements. The revised definition will potentially have implications for other RBI or SEBI Regulations which refer to the ECB Guidelines for the definition of 'infrastructure'. For example, per SEBI's previous notifications, foreign portfolio investors (FPIs) would be permitted to invest in unlisted NCDs issued by corporates in the 'infrastructure sector' (as defined in the ECB guidelines);
  • Financing for low cost housing schemes and working capital facilities for airline companies would be phased out by 31 March 2016 and this may dry up sources of financings for such cash-strapped sectors;
  • Permissions set out under the erstwhile ECB regime for spectrum allocation have been omitted under the Revised ECB Framework, which may be interpreted as the intention of RBI to disallow such end-uses, despite the telecom sector being a recognized 'infrastructure sector' borrower. RBI may, on a case-to-case basis, consider ECBs to be availed for spectrum allocation, under the approval route, such that Telecom companies have access to ECBs as and when a fresh round of spectrum auction is contemplated by the Government of India;
  • The all-in-cost requirements under Track III have been left to 'prevailing market conditions' and are dependent on the interest of foreign lenders to take exposure in Rupees to Indian borrowers. RBI may, in the future, consider re-assessing whether the all-in-cost requirements under Track II should be subject to a ceiling or should be left to market conditions;
  • NBFCs and NBFC-MFIs have been clubbed under Track III only for certain specific end-uses. Considering that such financial market players may be more sophisticated in terms of determining the foreign currency risks and have been raising foreign currency borrowings, RBI may consider providing such NBFCs access to foreign currency denominated ECBs under Track I and Track II.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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